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New Zealand has a love affair with trusts – but poor administration means that professional trustees are increasingly liable for the actions of non-professional trustees. The protection for the thousands of lawyers acting as professional trustees may come from a new generation of systems inspired by Facebook, writes Nigel Keats.

New Zealand is the world capital of the family trust. We have an estimated 300,000 – 400,000 trusts impacting up to one million people.

This makes trusts our favourite structure for managing and protecting assets – but scratch the surface of most trusts and you’ll find that all is not well.

Routine sloppy management practices – or outright mismanagement - has left most New Zealand trusts vulnerable to challenge. Martin Hawes, AFA and an author who has sold 120,000 books about New Zealand family trusts, estimates up to 75% of our trusts are vulnerable to attack.

And they are being attacked. In the past few years, the courts have taken a notably tougher line on trusts, trustees and their advisors as IR, beneficiaries and others have increasingly challenged trusts.

One of the biggest wakeup calls for professional trustees in recent times was the 2012 Court of Appeal decision in Commissioner of Inland Revenue v Newmarket Trustees Limited which found that professional trustees were liable for $293,000 of GST, incurred through the actions of a non-professional trustee. The judge’s ruling was that “all trustees are jointly and severally responsible” for the actions and omissions of the trust. The result included Newmarket Trustees being wound up and unable to remain as trustee for other 117 trusts.

The Law Commission supports this line. It recently recommended updating the Trustee Act, including a recommendation that the new Act should be more specific about the enforceable obligations of professional trustees.

All this sends a stark message to the thousands of Kiwi lawyers who act as professional trustees: Improve your trust management processes and oversight of your clients actions, or you leave yourself vulnerable to a potential tsunami of liability.

Of course that’s easier said than done when the major issue is the actions of third parties who have day-to-day control of the assets within the trust structure.

Enter the internet – and inspiration from the most unlikely of places, Facebook.

Contrary to popular belief, the influence of Facebook isn’t decreasing. Far from it. Not only are Facebook users continuing to grow, but its methods are being adopted by diverse industries ranging from education to law.

And Facebook is one of the inspirations behind a new cloud-based administration system that could be a solution to the professional trustee dilemma. The cloud is rapidly transforming the client-professional relationship in other professional services – most notably accounting via systems such as Xero.

Trustworks is another cloud-based service, but for trust administration, which takes the client-professional relationships a step further by adding in communication options inspired by some aspects of Facebook.

A Facebook user forms their circle of friends, then delivers and receives information from only those users.

In a similar way, Trustworks can create a group of users involved in each trust – both professional and non-professional to administer the trust collaboratively, no matter where they are in the world.

The first benefit to lawyers is administration improvements. But perhaps the greatest benefit to lawyers is risk minimisation if they’re acting as a trustee, either directly, or as a director of a corporate trustee company.

Trust professionals have clients who are more likely to be aware of, and comply with their obligations as a trustee and real-time oversight of their actions.

In extreme cases, systems like Trustworks offer professional trustees protection by showing that non-professional trustees took actions without their knowledge and without due process being followed.

If a system like this had been available to those who created and administered Newmarket Trustees, perhaps that company would still be around today.